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Richard Bernstein Tactical Series, American Industrial Renaissance®, 2019-1

Manufacturing Renaissance

A variety of factors are driving the manufacturing renaissance in the U.S. Slower growth in hourly compensation compared to some global competitors and lower natural gas and electricity prices are leading the U.S. to become one of the lowest-cost countries for manufacturing in the developed world, according to Boston Consulting Group (BCG). We believe the U.S. will have a competitive advantage over other countries, which could potentially allow U.S. industrial and manufacturing companies to gain market share.

For many decades, American companies sent their manufacturing work overseas. But today, in a trend known as “reshoring,” many companies are bringing their manufacturing back to the U.S. The ISM Manufacturing Index hit 52.8 in April, which indicates growth in manufacturing for the 32nd consecutive month. Thirteen out of 18 manufacturing industries reported growth. The April 2019 ISM Employment Index was at 52.4%, which indicates a growth in employment in April for the 31st consecutive month. Despite fears of trade wars and workforce shortages, U.S. manufacturers have continued hiring. In the last 12 months prior to February 2019, the manufacturing sector added an average of 22,000 jobs per month. This gain in manufacturing jobs is the result of both new reshoring and Foreign Direct Investment (FDI) by foreign companies into our manufacturing sector. In addition, for the seventh year in a row, business leaders around the world have chosen the U.S. as the number one place to invest (see Chart 1). According to an A.T. Kearney survey of corporate executives, this is likely a reflection of its large domestic market, continued economic expansion, competitive tax rates, and technological and innovation capabilities.

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Richard Bernstein Advisors believes the following four factors point to the U.S. gaining industrial market

Wages and Productivity

The U.S. manufacturing sector has benefited from a talented workforce, advanced technology, and pro-business policies. Although labor costs in the U.S. are significantly higher than other countries, the productivity levels found in the U.S. make up for this difference and have made the U.S. an attractive location for manufacturing investment. The wage gap in the U.S. in comparison to other countries has started to drop and is anticipated to continue to drop further as the cost of industrial robots falls. Disruptive technologies such as additive manufacturing, 3D-printing, advanced robotics, and the utilization of the Internet of Things and Big Data are revolutionizing the U.S. manufacturing sector. This advancement in technology has not only increased levels of productivity in the U.S., but has also made the U.S. one of the most attractive locations for high-technology manufacturing firms.1

Quality Control, Transportation Costs and Decreased Time to Market

Some companies that have already begun to reshore have cited the benefits in having designers, engineers and sales people at the same facility rather than oceans apart.2 The cost of shipping parts around the world and the associated time to market can create hidden costs that may negatively impact both profit margins and market share.

In 2018, the number of companies reporting new reshoring and FDI was at the highest level in history, up approximately 38% from 2017. The combined reshoring and related FDI announcements totaled over 145,000 jobs, the second highest annual rate in history. The total number of manufacturing jobs brought to the U.S. from offshore is estimated to be over 757,000 since the manufacturing employment low of 2010.3

1 Brookings
2 Source: A.T. Kearney
3 3Reshoring initiative

Energy costs

Natural gas had long been the second-most prevalent fuel for electricity generation behind coal. According to the U.S. Energy Information Administration, natural gas-fired generation first surpassed coal generation on a monthly basis in April 2015. Natural gas-fired generation has surpassed coal-fired generation in most months since then. In 2018, natural gas had the largest percentage contribution to electricity generation at 35.1%, coal contributed 27.4% and nuclear rounded out the top 3 at 19.3%.

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The Potential Advantage for Small Banks

Large U.S. banks have strayed from traditional lending sources of income toward more risky sources of return, for example, investing in corporate bonds rather than making corporate loans, according to Richard Bernstein Advisors (RBA).

RBA believes it may be prudent to avoid the larger banks until they return to their traditional income-oriented roots. In contrast, smaller U.S. banks generally have strengthening balance sheets and continue to aid U.S. capital formation. Admittedly, traditional banking typically has lower profitability ratios, but smaller U.S. banks do not need massive trading infrastructures and unnecessary global risk-taking to be profitable. Manufacturing is a capital-intensive business that requires equipment, tooling and raw materials. For the manufacturing renaissance to come to fruition, RBA believes manufacturers will turn to smaller banks for the financing required to hire more workers, buy new equipment and aggressively market themselves.

The Richard Bernstein Advisors Tactical Series, American Industrial Renaissance®, is a unit investment trust (UIT) which seeks above-average capital appreciation by investing in small- and mid-cap U.S. companies in the industrial and community banking sectors. The stocks are selected for the trust by Richard Bernstein Advisors using a comprehensive process and held for approximately two years. There is no assurance the objective of the trust will be met.

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Not FDIC Insured • Not Bank Guaranteed • May Lose Value

You should consider the portfolio's investment objectives, risks, and charges and expenses carefully before investing. Contact your financial advisor or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus, which contains this and other information about the portfolio. Read it carefully before you invest.

Risk Considerations
An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market.

You should be aware that the portfolio is concentrated in stocks in the industrials sector making it subject to additional risks, including limited diversification. The companies engaged in the industrials sector are subject to certain risks, including a deterioration in the general state of the economy, intense competition, domestic and international politics, excess capacity and changing spending trends.

The trust also invests in companies in the financials sector. The companies engaged in the financials sector are subject to the adverse effects of volatile interest rates, economic recession, decreases in the availability of capital, increased competition from new entrants in the field, and potential increased regulation.

An investment in a portfolio containing small-cap and mid-cap companies is subject to additional risks, as the share prices of small-cap companies and certain mid-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information.

This UIT is a buy and hold strategy and investors should consider their ability to hold the trust until maturity. There may be tax consequences unless units are purchased in an IRA or other qualified plan.

The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.

As the use of Internet technology has become more prevalent in the course of business, the trust has become more susceptible to potential operational risks through breaches in cyber security.

 
Fund Cusip Information
30309E781 (Cash)
30309E799 (Reinvest)
30309E807 (Cash-Fee)
30309E815 (Reinvest-Fee)
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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